Question

Blossom Company estimates that variable costs will be 70.00% of sales, and fixed costs will total $474,000. The selling price of the product is $5. Compute the break-even point in (1) units and (2) dollars. (1) Break-even sales units (2) Break-even sales Assuming actual sales are $2,000,000, compute the margin of safety in (1) dollars and (2) as a ratio. (1) Margin of safety (2) Margin of safety ratio

Answer 1

(1) Contribution margin ratio = 100% - 70% = 30%

Contribution margin per unit = $5 × 30% = $1.50

Break-even sales = Fixed costs / Contribution margin per unit = $474,000 / $1.50 = 316,000 units

(2) Break-even sales = Fixed costs / Contribution margin ratio = $474,000 / 30% = $1,580,000

(1) Margin of safety = Actual sales - Break-even sales = $2,000,000 - $1,580,000 = $420,000

(2) Margin of safety ratio = Margin of safety/ Actual sales = $420,000 / $2,000,000 = 0.21 or 21%